National Restoration Fund: New Tool to Restore Ukraine?

In mid-September, the draft budget for 2024 was registered in the Parliament. It retained the priority financing of defense spending and provided for an increase in spending on social security and financing of part of the central authorities. Given the mobilization of funds for defense needs, the costs of restoring the country from the consequences of the full-scale invasion in 2024 are proposed to be reduced.

This applies directly to the Fund for the Liquidation of the Consequences of Armed Aggression, which is the source of financing the reconstruction of the infrastructure destroyed or damaged as a result of the war, as well as compensation payments within the framework of the eRestoration. The expenditures of other funds (the State Regional Development Fund, the State Road Fund) that could be used directly or indirectly to finance the country’s recovery needs will also be reduced. In addition, the relevant Agency for the Restoration and Development of Infrastructure fell under the cost reduction.

Given such budgetary prospects, the further reconstruction and recovery of the country will largely depend on the financial support of our international partners. But its provision will require the use of tools that will provide for the maximum level of transparency and accountability, targeted and efficient use of funds.

The National Restoration Fund could potentially become such a tool; it is proposed to be created as part of the national budget to eliminate the consequences of armed aggression and restore critical infrastructure, housing, and implement priority measures to restore the country.

The areas of financing by the National Restoration Fund mostly coincide with the Fund for the Liquidation of the Consequences of Armed Aggression, and the procedure for using the funds will also be approved by the Cabinet of Ministers. However, in other aspects, the National Restoration Fund will differ significantly.

The key difference is enshrining the provisions on the establishment and operation of the National Restoration Fund in the Budget Code. This should ensure its sustainability, in particular sources of filling it and financing of recovery needs. Institutionalization in the Budget Code will also reduce the impact on the fund on the part of various branches of the authorities and representatives of political forces during the budget process.

The main source of its funding will be the resources of international partners: both grants and loans from the European Union, foreign governments, international organizations, and donor institutions. Accordingly, the financing of the country’s reconstruction needs at the expense of international assistance and funds from sanctions and forcibly seized Russian assets will be divided; the Fund for the Liquidation of the Consequences of Armed Aggression will exclusively be filled at the expense of the latter.

The requirements to apply the methodology for prioritizing projects financed by the National Restoration Fund will also be enshrined in the Budget Code. This is important because currently, the methodology used in the selection of projects for financing from the Fund for the Liquidation of the Consequences of Armed Aggression is advisory in nature.

The decision on the allocation of funds from the National Restoration Fund will be adopted by the Cabinet of Ministers, but unlike with the Fund for the Liquidation of the Consequences of Armed Aggression, it will be done without the approval of the Budget Committee of the Verkhovna Rada. That is, in the case of the National Restoration Fund, it is proposed to eliminate the risk that we indicated regarding the Liquidation Fund.

Among the risks of the initiative are the following:

• the possibility of allocating funds for the construction or repair of facilities that were not destroyed or damaged as a result of armed aggression;
• preservation of expenditures for which separate funding is provided in the budget (for example, the purchase of school buses);
• the possibility of excluding certain expenditures from priority ones (financing other works and services for the implementation of restoration measures by the decision of the Cabinet).

By the second reading, the Budget Committee of the Parliament suggested rejecting the proposal to establish a National Restoration Fund.

We share the importance of defense spending. We are also convinced that in the context of growing state spending on social security, health care, and other basic areas of its functioning, the financing of the country’s recovery should continue. But the funds received, including from international partners, should be directed to the most important and priority needs. Therefore, a key aspect in the operation of the proposed National Restoration Fund or any other budget programs should be to ensure transparent distribution and efficient use of funds.

This publication was made possible by the support of the American people through the United States Agency for International Development (USAID) within the SACCI project. The contents of this publication are the sole responsibility of Transparency International Ukraine and do not necessarily reflect the views of USAID or the United States Government.